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Financial performance impacted from sale of key businesses
Q2FY11 results reflect Piramal Healthcare’s (PIHC) transitionary phase, with
operations impacted due to domestic formulations and diagnostic businesses sale
during the quarter and hence are not reflective of the PIHC’s continued potential
in residual business. Revenues, at INR 7.5 bn, declined 25% Y-o-Y, while sales
from residual business (excl OTC) declined 27% Y-o-Y. GCC reported a sharp
decline in revenues—28% Y-o-Y and 41% Q-o-Q. CRAMs business grew 22% Qo-
Q to INR 2.7 bn from INR 1.75 bn in Q1FY11. EBITDA margin of (-1.7%) had
impact from one-off undisclosed charges (including bonus paid to employees of
INR 1.2 bn) from deal closure. PIHC recorded one-time gain of INR 162.2 bn and
paid tax of INR 36 bn on total deal value; adjusted for these one-offs, adjusted
net loss was ~INR 710 mn during Q2FY11. PIHC indicated that operations during
the quarter have been unusually affected by business sell-offs and expects
residual businesses to revert to normal operations in the coming quarters.
Buy back of shares will potentially be value accretive
PIHC’s share buyback proposal (20% of outstanding shares at INR 600 per
share) is more tax efficient and increases fair value per share compared to
normal dividend payout, in our view. This will lead to a potential cash outflow of
INR 25 bn (INR 120 per share), post which the company will have INR 35 bn of
cash. The offer will be open for tendering shares by Jan-Feb 2011 and will
include participation by promoters in the same proportion as minority
shareholders, thereby maintaining the overall proportionate share holding. We
estimate the (post share buyback) fair value of the stock at INR 500-600 per
share, based on residual business (11x FY12E valued at INR 100) and cash
retained (valued at 0.75-1.0x at INR 400-500), which provides downside support
to CMP, in our view.
Outlook and valuations: Recommend buyback; ‘Under Review’
We believe that shareholders should avail of the current open offer and tender
shares given marginal upsides from current fair value of residual business.
Moreover, option to not tender shares is dilutive to current shareholders and
only marginally accretive at fair value of residual business. We also note that the
share buyback would likely benefit long term investors in PIHC to short term
investors. However, given the uncertainty and risks associated with cash
utilization (PIHC has indicated that strategic utilization of cash proceeds would
likely be medium-term and not necessarily in healthcare), we have put our TP
and recommendation ‘Under Review’.
